Sentiment for Telecom Stocks: Positive and Negative

In a review entitled 'Bearish sentiment rising,' Merrill Lynch analyst Tal Liani expresses his views on the situation in telecommunications. He divides the companies into two groups, 'negative sentiment leaders' and 'positive sentiment leaders.'

Four companies are listed in the 'negative sentiment' group: Tellabs Inc. (Nasdaq: TLAB), Comverse Technology (Nasdaq: CMVT), Juniper Networks (Nasdaq: JNPR) and Qualcomm Inc. (Nasdaq: QCOM).

Three names appear in the 'positive sentiment' group: AudioCodes (Nasdaq: AUDC), Ciena Corp. (Nasdaq: CIEN), and F5 Networks (Nasdaq: FFIV).

What exactly is negative or positive sentiment? According to Liani, it's all about short positions on stocks, put/call ratios, and analysts’ sell-side ratings. These criteria, he claims, determine the sentiment towards the stock or company. I disagree with Liani, who I feel is one of the best analysts around, about the definition of sentiment. I do so because I feel there is no way to test for sentiment, as Liani describes it, on Main Street.

Even a child will realize that if tomorrow, for example, the options investigation at Comverse ends with no formal charges, and if the war in the Middle East ends the day after, this sentiment will evaporate, right? Comverse has fallen more than 40% in the eight weeks since the beginning of May. Why did it fall? Because of its business? No. It fell because of the options backdating affair.

From an economic point of view, Comverse is in a far better position than it was in when it hit its low at the end of 2002. Back then, when it was traded at $6 a share, everyone feared that its business was history. Today, business is booming. Its problem is the investigation. Note that for all the 'negative sentiment' that Liani talks about in his review, not one single analyst has recommended selling Comverse, while some analysts have even recommended selling stocks such as Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA) or Check Point (Nasdaq: CHKP).

When the company in question is a public one (one which up to the time of the inquiry was valued at a premium), the assessment of it varies according what is happening on the ground, on Main Street, and what people think will happen, on Wall Street. The problem is that what people think in Wall Street is based on expectations about stock movement, while people’s thoughts on Main Street are based on facts on the ground.

When you read Tal Liani’s comments on Comverse, it is clear that he made his analysis from the point of view of the stock, and the fact that he bases his comments on the number of short sellers only reinforces the point. Why are people increasing their short positions on Comverse? Is it because of its failed business? Certainly not. They are doing it because of the developments they expect in the inquiry. At this stage of the game, there is no connection between the factors Liani calls sentiment influencers and Comverse's situation.

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.